A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is ________.
A) 7.2 percent
B) 12 percent
C) 12.4 percent
D) 15 percent

Question

Quizplus · Accepted Answer

The cost of preferred stock is calculated using the formula:

Cost of Preferred Stock = Annual Dividend / Net Proceeds from the Sale of the Stock

Net Proceeds from the sale of stock = Par Value – Issuance Cost 
= $125 – $4 
= $121

Therefore,

Cost of Preferred Stock = $15 / $121 
= 0.1239 or 12.39% (rounded to nearest tenth)

Hence, the answer is choice C (12.4 percent).

A Firm Has Issued Preferred Stock at Its $125 Per